Special Category Status For States — NDTV Profit Explains

The Janata Dal (United)'s demand for special category status for Bihar may put the Bharatiya Janata Party, which also heads the National Democratic Alliance, in a spot. The Nitish Kumar-led party's support is crucial for Prime Minister Narendra Modi's third stint in office. But what's a special category status and will it benefit Bihar?

The concept of a special category state was introduced in 1969 when the fifth Finance Commission sought to provide certain disadvantaged states with preferential treatment through central assistance and tax breaks, according to PRS Legislative Research.

The rationale was that certain states, because of inherent features, have a low resource base and cannot mobilise resources for development.

According to the government, some of the features required for special status were:

• Hilly and difficult terrain.

• Low population density or sizeable share of tribal population.

• Strategic location along borders with neighbouring countries.

• Economic and infrastructural backwardness.

• Non-viable nature of state finances.

The Union government decided to grant special category status in 1969 to Assam, Nagaland, and Jammu and Kashmir in view of their locations. Later, the status was extended to other states.

Such states would get a grant of up to 90% and 10% as loan under Central assistance as against 30% grant and 70% loan normally.

Special category states also received specific assistance addressing features like hilly areas, tribal sub-plans and border areas. Beyond additional plan resources, these states have enjoyed concessions in excise and customs duties, income tax rates and corporate tax rates as determined by the government.  

Radhika Pandey, associate professor at National Institute of Public Finance and Policy, said it would help to have specific criteria to accord the status.

"In terms of implications, these states do see financial benefits. States such as Bihar are in poor fiscal shape, with its own tax revenues being low as a share of the overall revenue," she told NDTV Profit. "But it does present a political challenge and it's a difficult ask, especially given the government's thrust on fiscal consolidation and debt reduction."

Since the 14th Finance Commission did away with special status to states, the 15th Finance Commission attempted to compensate states by higher tax devolution or more state-specific grants, Pandey said.